[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.551-3]

[Page 285]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.551-3  Deduction for obligations of the United States and its 
instrumentalities.

    (a) Each United States shareholder required to return his 
distributive share of undistributed foreign personal holding company 
income for any taxable year shall take into account in computing the 
credit against tax under section 35, or the deduction under section 242, 
whichever is allowable to such shareholder, his proportionate share of 
whatever interest on obligations of the United States or its 
instrumentalities (as specified in sections 35 or 242, as the case may 
be) may be included in the gross income of the company for such taxable 
year, with the exception of any such interest as may be so included by 
reason of the application of the provisions of section 555. For 
reduction of credit for such interest on account of amortizable bond 
premium, see section 171 and the regulations thereunder.
    (b) The rule set forth in paragraph (a) of this section may be 
illustrated by the following example:

    Example. The M Corporation is a foreign personal holding company 
which owns all the stock of the N Corporation, another foreign personal 
holding company. Both companies receive interest on obligations of the 
United States or its instrumentalities as specified in section 35. In 
determining the amount of the credit allowable under section 35 (if the 
shareholder is an individual) or the deduction allowable under section 
242 (if the shareholder is a corporation), the United States shareholder 
of the M Corporation would be entitled to a credit or a deduction, as 
the case may be, only for his proportionate share of the interest 
received by that Company and not for any part of the interest received 
by the N Corporation, regardless of whether the interest received by the 
N Corporation is included in the gross income of the M Corporation as an 
actual dividend or as a constructive dividend under section 555.